It is unlikely that the bullish sentiment currently driving oil markets can be sustained over a prolonged period, but Middle Eastern producers are determined to make the most over higher prices while they last. On the back of ballistic missile attacks on Saudi infrastructure and OPEC+ quota roll-overs, the global benchmark Brent surpassed the key threshold of $70 per barrel for the first time in more than a year. Concurrently, backwardation steepened even further, with a solid $7 USD difference between April 2021-April 2022 contracts. Against such a background, Saudi Aramco and other Middle Eastern NOCs have opted for a conservative approach, increasing prices of lighter grades as gasoline cracks have been improving throughout February, all the while rolling over heavier streams into the next month.
Graph 1. China’s Crude Imports in 2010-2021 (million barrels per day).
Source: author’s data.
One of the key factors in oil markets over the past few months has been China’s robust demand. For the 3rd month in a row, China’s monthly seaborne crude purchases have averaged above 10mbpd. With pipeline imports from Russia (approximately 3.5 million tons per month) that would swing above 11mbpd. Such healthy demand has several underlying reasons – new refineries such as Hengli and Zhejiang are readying for maximum capacity production, the teapot refineries have availed themselves of the allocated quotas for 2021, and overall refining margins improved in January-February 2021. The independents’ allocation is of special significance as the first batch of quotas for 2021 was hiked by a whopping 18% from 2020, to 98.75 million tons. Despite the robust Q1 2021, the forthcoming quarter is headed towards a weaker start.
March 2021 might be the healthiest month of H1 2021 in terms of Chinese crude demand, yet it needs to be noted that roughly 7 million tons (more than 52 MMbbls) of crude was moved into March from February as port congestion caused by bad weather once again became a pertinent issue. A weakening of Chinese crude demand looking into April 2021 remains very likely – amongst others, almost 1mbpd of refining capacity across 6 large-scale refineries will be taken offline on the back of refinery maintenance season. Concurrently, the surge of Brent above $65 USD per barrel coupled with steep backwardation that heavily penalizes prolonged storage has cooled the erstwhile enthusiasm of Chinese refiners.
Start Trading CFDs In Over 2000 Markets Today Graph 2. Saudi Aramco Official Selling Prices for Asia in 2018-2021 (vs Oman/Dubai Average, USD per barrel).
Source: Saudi Aramco.
It should be noted that Saudi Arabian exports to China are set to decrease significantly in March, down 25% from February 2021, at 1.45mbpd. The same declining trend also applies to Iraqi barrels moving to China, following a run of robust demand in January and February, March arrivals are expected to plunge below the 1mbpd mark, at 0.91mbpd. Falling demand for Middle Eastern barrels will be compensated by a spectacular surge in Brazilian grades (assumed to amount to 0.9mbpd in March 2021, having averaged 0.5mbpd in the previous six months). Here one should add that March-arriving Brazilian cargoes were loaded in January as the average sailing time is 50-60 days – in fact, every single VLCC that loaded Lula in January 2021 ended up in China.
Cognizant of the abovementioned trends, Saudi Aramco decided to follow a fairly logical strategy with its Asian OSPs – the lighter its grade, the bigger its month-on-month increase. Thus, Arab Heavy was simply rolled over from February (when it was also left unchanged, see Graph 2), whilst Arab Extra Light rose by 60 cents m-o-m to a 1.20 USD per barrel premium to the Oman/Dubai average. On the one hand, such an ambitious hike might seem counterintuitive for a month when many refiners will either go into maintenance or will decrease refinery runs amid still-depressed regional demand. On the other hand, the Saudi NOC is seemingly betting on arbitrage opportunities shrinking (a wider Brent/Dubai EFS certainly does indicate this) and East Asian buyers will have to make do with Middle Eastern grades.
Graph 3. Saudi Aramco Official Selling Prices for Northwestern Europe in 2018-2021 (vs ICE Bwave; USD per barrel).
Source: Saudi Aramco.
The Brent/Dubai EFS, essentially the spread between light sweet and heavy sour grades, surged to its highest in 15 months on February (3.18 USD per barrel), so now the only thing that might alleviate market developments in Asia would be Saudi Aramco partially curtailing its term allocations. Interestingly, Saudi Aramco’s official selling prices for Europe-bound cargoes reflect a much more conservative approach, largely stemming from the Saudi NOC overshooting its March 2021 prices. For April 2021, Aramco dropped all grades by $1.50-$1.80 USD per barrel, committing to the steepest cuts with its heaviest stream, Arab Heavy (see Graph 3). Only 5 MMbbls of Saudi crude loaded in February to Europe, hence the NOC’s April prices are a clear indication of its willingness to get back to action, battling for its place in the European refining market against the invariably weak Urals.
Graph 4. Iraqi Official Selling Prices for Europe in 2018-2021 (USD per barrel; vs Dated Brent).
Although the Iraqi state oil marketer SOMO went much softer with its Europe-bound prices than its Saudi Arabian peer, Iraq nevertheless mirrored Aramco’s steep European price cuts for April 2021. With Basrah Light, SOMO surpassed Aramco’s aggressive pricing, dropping the lightest of Iraqi grades by $1.90 per barrel from March 2021, to a -$2.5 USD per barrel discount to Dated Brent, its lowest level since June 2020. The European OSPs of other marketed grades were dropped by 1.4-1.8 USD per barrel (see Graph 4). As opposed to Saudi Aramco which has seen a rather weak start to 2021 in terms of its European exports, Iraq has been on the upswing ever since it bottomed out in December 2020 (0.42mbpd), loading 0.64mbpd of crude (incl. Kirkuk) this February. Thus, Iraq is expressing its interest to maintain an alternative market outlet for its crude so as not to depend on Asia too much.
Graph 5. Basrah Light-Arab Medium Spread in 2018-2021 (USD per barrel).
Source: Saudi Aramco/SOMO.
The Iraqi state oil marketer followed Saudi Aramco’s lead with its Asian prices, hiking Basrah Light by 15 cents and Basrah Medium by 25 cents per barrel, to respective premia of $1.3 and $0.1 USD per barrel against the Oman/Dubai average. Basrah Heavy, the exports of which to Asia have heretofore been remarkably stable at 0.6-0.65mbpd, has seen its April price rolled over from the previous month. Traditionally, SOMO has sought to maintain a pricing balance between its Basrah Light and the Saudi Arab Medium. The COVID pandemic and then quality reshuffling or Iraqi grades have totally upended the previous balancing point, leading to wild swings throughout 2020. The developments of January-April 2021, however, seem to indicate that SOMO has found a new balance around 35-40 cents of the Basrah Light-Arab Medium spread (see Graph 5).
Graph 6. ADNOC OSPs in 2017-2021 (vs Dubai/Oman Average; USD per barrel).
The Asian market’s preference for lighter grades has been an indisputable boon for the United Arab Emirates, whose ADNOC has increased its April prices by 15-30 cents per barrel month-on-month. Perhaps wary of Aramco’s excessive optimism, perhaps more enlightened thanks to the 2-day difference between the respective dates of issuance, ADNOC’s Asian price-setting policy turned out to be tangibly more modest than that of its Saudi counterpart – just to provide a couple of examples, Upper Zakum was hiked by 15 cents to a $0.9 USD per barrel premium over Oman/Dubai (peer grade Arab Light rose by 40 cents), whilst Murban rose by 30 cents to a $1.05 USD per barrel premium against Oman/Dubai (Arab Extra Light rose by 60 cents).
By Viktor Katona for Oilprice.com
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